Oil prices edge higher as US and Europe consider fresh sanctions on Russia

Prices are expected to continue to rise in second quarter amid higher demand and supply concerns

Oil pump jacks in Walsheim, Germany. Crude prices have surged to almost $140 a barrel soon after Russia's invasion of Ukraine in February. EPA

Oil prices continued to climb on growing supply concerns on Tuesday, as the US and its European allies consider imposing a fresh round of sanctions on Russia for its military offensive in Ukraine and the Iran nuclear talks appear to have hit a standstill.

Brent, the global benchmark for two-thirds of the world's oil, was trading 1.5 per cent higher, at $109.1 per barrel at 12.55pm UAE time on Tuesday, while West Texas Intermediate, the gauge that tracks US crude, was up 1.58 per cent higher at $104.9 a barrel.

“Pressure is on European countries to punish Russia for its action in Ukraine by imposing energy sanctions,” said Naeem Aslam, chief market analyst at Avatrade.

“The invasion of Ukraine by Russia in February heightened supply fears that were already weighing on pricing. Sanctions against Russia and consumers' avoidance of Russian oil have already resulted in a decline in output, raising worries of much more significant losses.”

Washington will announce a new package of sanctions against Russia for its invasion of Ukraine this week, US national security adviser Jake Sullivan said on Monday. The EU, which relies heavily on Russia to meet its energy needs, remains divided about extending the sanctions to Russia's energy exports and is under pressure to announce new punitive measures that could reduce supplies from the world's second largest energy exporter.

Russia accounts for about 10 per cent of the world’s energy output, including 17 per cent of its natural gas and 12 per cent of its oil. The US and UK have already banned Russian oil imports.

Crude prices surged to almost $140 a barrel in March after the US said it was banning Russian energy imports and the UK said it would phase out its import of crude. Price subsequently fell amid a rise in coronavirus cases and tighter lockdowns in China, the world's biggest importer of oil.

Stalled nuclear talks with Iran have led to oil prices rising again “but the pause doesn't mean that conversations are over as negotiations behind doors are taking place, and lifting sanctions on Iranian oil would ease oil supply concerns,” Mr Aslam said

Iran, among larger Opec producers, will be able to boost exports by about a million barrels per day within a matter of months once sanctions are lifted. Tehran has been exempt from the production cuts under the Opec+ agreement because its crude oil production remains limited by US sanctions. The US Energy Information Administration estimates Iran’s production could return to full capacity, at 3.8 million barrels per day, if Washington lifts the sanctions.

The Ukraine conflict has contributed to a rise in the commodities market, with the prices of oil, metals and wheat surging.

“This is now the largest commodities supply shock since the 1973 oil embargo,” said Ehsan Khoman, director of emerging markets research for Europe, the Middle East and Africa at MUFG Bank.

“However, unlike the 1970s, which was restricted to oil and was a sellers-boycott, the current crisis involves every commodity and is a buyers-boycott – and by delineation more permanent.”

He expects commodity prices to continue to rise in the second quarter and "demand destruction remains the only practical mechanism to rebalance exceptionally tight commodity markets in the near-term."

A decision by US President Joe Biden last week to release the largest-ever volume from the country's Strategic Petroleum Reserves,180 million barrels over the next six months to cool oil markets briefly pushed oil prices down.

“The US SPR release may alleviate some market tightness, but it won’t resolve the structural imbalances resulting from years of underinvestment at a time of recovering global demand for oil,” said Giovanni Staunovo, commodity strategist at UBS.

“The release significantly reduces the buffer to address future production disruptions and makes consumer nations more vulnerable if inventories are not refilled.”

The International Energy Agency has also said its members have agreed to release more oil from emergency reserves to offset the market turmoil caused by Russia’s war in Ukraine.

Oil prices have been affected by years of underinvestment in the energy industry since the collapse of oil prices in 2014, which has limited the output of producers. Prices have also increased as a result of the rising demand and a faster than expected economic recovery from the Covid-19 pandemic.

Total investment in the upstream sector of the oil and gas sector fell 23 per cent below pre-coronavirus levels to $341 billion in 2021, while oil demand continued to rise globally, a report by the International Energy Forum and IHS Markit has said.